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Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2011 for the...

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Accounting

Alt Corporation enters into an agreement with Yates Rentals Co.on January 1, 2011 for the purpose of leasing a machine to be usedin its manufacturing operations. The following data pertain to theagreement:
(a) The term of the noncancelable lease is 3 years with no renewaloption. Payments of $155,213 are due on December 31 of eachyear.
(b) The fair value of the machine on January 1, 2011, is $400,000.The machine has a remaining economic life of 10 years, with nosalvage value. The machine reverts to the lessor upon thetermination of the lease.
(c) Alt depreciates all machinery it owns on a straight-linebasis.
(d) Alt's incremental borrowing rate is 10% per year. Alt does nothave knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that AltCorp. is the defendant in a suit which is sufficiently material tomake collectibility of future lease payments doubtful.

Question: 1.what is the amount of the reduction in the leaseliability for Alt Corp in the second full year of the lease if AltCorp accounts for the lease as a finance lease.

2.If the leased machine has a $350,000 cost to Yates, the profitYates get from the lease should be ?

Answer & Explanation Solved by verified expert
4.2 Ratings (765 Votes)
1 The secondyear lease liability reduction is 126734 Calculations are given below The initial entry passed by Alt Corp is Leased Asset 400000 Lease Liability 400000 As the payment    See Answer
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